Accounting Exam

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33 Terms

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GAAP Assumptions

  1. Business Entity Concept: A businesses transactions are separate from its owners

  2. Continuing Concern Concept: Assumes that a business will continue in the future if if preforming poorly

  3. Time Period Assumption: A businesses life is divided into time periods

  4. Monetary Unit Assumption: Data is kept using a monetary unit

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GAAP Principals

  1. Cost Principle: The value of an item stays the same amount as it was purchased for even if it decreases

  2. Objectivity Principle: Two different people should be able to calculate the same amount. (no personal feelings involved)

  3. Conservatism Principle: Do not anticipate future loss or growth

  4. Materiality Principle: Must include all information related to the business even if negative

  5. Consistency Principle: Businesses have to keep things consistent within their records.

  6. Reevaluation Principle: Allows accountants to change the value of assets based on changes in market prices

  7. Revenue Recognition Principle: Revenue must be recorded the time the transaction was made

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Accounting Cycle

  1. Analyze Transactions

  2. Journalize Transactions

  3. Post to Ledger accounts

  4. Prepare an unadjusted trial balance

  5. Adjusting entires

  6. Create a worksheet

  7. Create an adjusted trial balance

  8. Closing entires

  9. Post closing trial balance

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Accounting Equations

A = L + OE

L = A - OE

OE = A - L

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Source Documents

These are documents that confirm a businesses transactions (Cheques, Bills, Receipts, etc). Relates back to objectivity principle

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Debit/Credit Theroy

Debits on the left, Credit on the right

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Cash Sales Slip

A source document that proves a transaction paid with cash

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Sales Invoice

Shows that a sale was made on account

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Purchase Invoice

Shows a purchase made on account

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Cheque Copies

Shows a transaction made with a cheque/cash

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HST (Harmonized Sale Tax)

HST - 13% (5% GST & 8% PST

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How to find an error (4 tests)

  1. If the trial balance is a multiple of 10, an addition error has likely been made therefore re-add the trial balance columns

  2. Check that the values in the journal and the trial balance are equal

  3. Divide the trial balance difference by 2 and search the ledger or journal for that value and make sure it was debited or credited correctly

  4. If the trial balance difference is a difference of 9, a transposition error (order of digets) or a misplaced decimal point.

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Depreciation

A reduction in value of an asset

Aka: Amortization (Reduction of value to zero)

Applies to long term assets

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Straight Line Depreciation

This method assumes depreciation is the same every year.

Formula: (Cost of assets - Salvage Value)/Useful life of asset

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Adjusting entry: straight line depreciation

Depreciation Expense (Income Statement): Represents depreciation just this year

Accumulated Depreciation (Balance Sheet): Represents depreciation from all previous years

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Declining Balance Depreciation

This method assumes the asset is used more in its early life then later on

Formula: Original capital cost - (Capital Cost x CCA Rate)

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Adjusting entries: Declining Balance Depreciation

Depreciation Expense (Income statement): Represents depreciation just this year

Accumulated Depreciation (Balance Sheet): Represents depreciation throughout an assets life

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Half Life Methodm (Declining Balance Depreciation)

  1. Divide the first year capital cost of an asset by 2 and calculate declining balance depreciation from there

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Real Accounts (closing entries)

Accounts that will never be closed:

  • Assets

  • Liabilities

  • Capital

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Nominal Accounts (closing entires)

Accounts that will be closed next year:

  • Revenue

  • Expenses

  • Drawings

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Closing Entires

  1. Depreciation Expense (optional)

  2. Supplies Expense (optional)

  3. Revenue

  4. Expenses

  5. Net Income

  6. Drawings

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Merchandise Businesses

A businesses that buys merchandise and sells them

2 Types:

  1. Wholesaler: Buys. merchandise from manufacturer, sell to retailer (Costco)

  2. Retailer: Buys merchandise from wholesaler and sells to public (Footlocker)

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Inventory Formula

Beginning Inventory + Cost of goods purchased - Cost of goods sold = Cost of ending inventory

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Cost of goods sold formula

Beginning Inventory + Cost of goods purchased (add Freight In) (subtract returns) - Ending Inventory

Beginning Inventory + Cost of Goods Purchased = Inventory available to sell

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Gross Profit Margin

Sales - Cost of goods sold

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Periodic Inventory System

An accounting method where businesses do not update merchandise inventory account until the last day of the fiscal cycle

Flaw: Time consuming since physical count is required and does not provide a current count of inventory

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Freight In

An expense for shipping of products

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Sales terms

Net 30 - Full amount is due in 30 days

Net 60 - Full amount is due in 60 days

2/10, n/30 - 2% discount if paid in 10 days or full price in 30

1/15, n/60 - 1% discount if paid in 15 days or full price in 60

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Perpetual inventory system

An accounting method where businesses keep an up to date log of transaction/inventory.

Purchase account turns into Merchandise Inventory

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Financial Position

A summary of items owned owed, and net worth. (Assets, liabilities, capital)

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Unwritten Accounting Rule

At least 2 accounts are impacted during a businesses transaction

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Equation Analysis Sheet

Shows a companies financial position in chart form

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